VANCOUVER (NEWS1130) – Businesses will pay more. You, the taxpayer, will lose more. The banks will earn more.

Small business owners say this is not exactly a winning combination as the federal government plans some rule changes for the Canada Small Business Financing Program.

The proposal would bump up the maximum interest rate charged on federally guaranteed small-business loans by three-quarters of a percentage point and allow financial institutions to charge administrative fees not currently permitted under the program.

“We have some worries about this,” says Dan Kelly, President and CEO of the Canadian Federation of Independent Business. “In fact it seems like an odd time, during Small Business Week, for the federal government to be proposing changes to the Small Business Lending Act that would actually give more money to the bank and make it, we think, more costly and possibly less accessible for small businesses to access financing.”

Kelly feels the small business lending program is a good one and the proposed changes are intended to do the right thing but they miss the mark.

“We’re looking at raising the interest rates that small businesses pay, looking at adding application fees and, on top of that, one of the biggest worries for us is having personal guarantees. Currently, if you’re a small business owner, to get one of these federal loans through one of the banks you have to provide up to a 25 per cent personal guarantee. Now they’re looking at making that a 100 per cent personal guarantee,” says Kelly. “We’re starting to debate whether this program is going to be particularly useful for small businesses if these regulations go ahead.”

“With the personal guarantee, it might mean you’ve got your house on the line. If you wanted to put your house on the line, you’d probably want to go through a traditional lending source as opposed to looking at one of these government-backed loans,” he adds.

“The banks have made the case they are not using these small business loans as frequently as they would because they’re not as profitable, but the piece that gets forgotten in this is that the government guarantees up to 85 per cent of the loan, therefore they are significantly lower risk.”

“One of the problems that we have in Canada with our banking system is they really don’t price for risk. Usually small business owners will agree there’s a risk so they are prepared to pay a little higher interest rate to accommodate that. But the banks in Canada, even with a government guarantee, want to have higher interest rates. That’s the part we worry about,” Kelly explains.

The proposal estimates financial institutions will earn an additional $141 million over 10 years, small business borrowers will face additional costs of $233 million and the program, which is supposed to break even, would see its losses grow by about $41 million.